Privatisation is no longer a four-letter word. Along a long and winding road, and one which allowed India to contribute a word to the English language—disinvestment—Budget FY22 will begin the process of withdrawal of the state from its extended stay. Bank nationalisation in 1969 signalled a new era—just 50 + years later, India has changed course for the better. In India, unlike Western economies, the Budget is something well beyond an accounting statement. If there was nothing else in the Budget but just this change of a word, it would be historic. But there was more, much more. Actually, if you ask me, with the benefit of five days of ex-post hindsight, as to what I would change in the Budget, the answer would be—nothing. (And I have been watching and commenting on the budgets for the last 35 years, and continuously since 1997). Does that mean that economic reform is complete? Of course not; but it does mean that the process towards the goal of greater economic freedom, and faster and more equitable economic development, and maturity, has well and truly begun.
For some time now, say the last two decades, a new world macro has been developing. Part of this new macro is that the fiscal deficit is no longer what it used to be. Discussion about fiscal deficits was the hallmark of a serious economist—his adherence to calculations of the fiscal deficit and her worry about what would happen to inflation. In that regard, many of us forgot the original meaning of fiscal deficits and their importance. When you have unemployment, a considerable portion of deficit financing can go towards growth, rather than inflation.
In addition, inflation today is considerably more than a domestic matter—it is a global concern. How the world has changed, and part of the new macro we live in is that the concern about inflation, and definitely so in the advanced economies, is that inflation is not high enough. The median inflation in developing economies in 2019, before Covid, was just 1.5% above the low sub 2% levels in advanced economies. How post-Covid the wage rate will rise enough to cause a sustained increase in inflation remains to be seen. But the writing is on the global wall—“high” inflation is not at all likely—and is not a concern.
The relegation of the fiscal deficit to a secondary role in economic policy was the second big departure from a conventional business as usual Budget. Like the beginning of privatisation (or the beginning of the dismantling of the old socialist economic order), the beginning of the unimportance (within reason!) of fiscal deficit calculations was also a historic component of Budget FY22. The conventional argument, as articulated by many, was that fiscal deficit was something to really worry about, hence taxes must be raised to keep the deficit within limits, etc. There was serious talk of a Covid cess, a wealth tax, and an increase in the tax rate for the rich. We need to ask, as FM Sitharaman has (indirectly) asked—show me the evidence that increasing tax rates increase tax revenue. She took the extra-bold step of reducing corporate taxes in September 2019. India awaits a comprehensive reform of the direct tax code, something I had argued, along with others. It did not happen—but the stage is set for such reform.
Another historic first is the attempt to achieve transparency in the fiscal math. One giant step for India. Translated, this means that for the first time, the Budget is the old-fashioned (but not old) WYSWYG—what you see is what you get. If the government borrows from the Food Corporation of India (to finance MSP purchases, what else), it will now appear as part of expenditures, and as part of the deficit.
An additional first, and here I am being just a bit speculative. The GDP growth estimates — a nominal GDP growth of 14.5% is forecast. Normally, finance ministers in India tend to over-estimate, and most often, fall short. Budget FY22 might be the first to significantly exceed the forecasts. I did say speculative, but the recovery numbers are compelling. Nominal GDP growth of 20% in fiscal FY22 is possible; around 18 % is likely. Conventional wisdom is of real GDP growth of 10-12%; bump that number up by at least 2 percentage points to arrive at realism.
One strong indication that the Budget was outstanding is the fact that critics, especially the habitual ones (and ones closely associated with the political opposition?), were reduced to stating that the Budget forecasts would be in error because of problems of “execution and implementation”. That is not two problems, just one—both mean the same! And what would be the problem in increasing expenditures on health, roads, electricity, and capital formation? I have not talked about the large increase in the Budget on capital expenditures, or the increase in expenditures on health, education, etc. If you don’t raise expenditures, then the complaint is that you are not doing enough for investment, for growth, for the poor. If you do raise capital expenditures, and in the desired sectors, then the argument is that you will not be able to execute.
This is similar/identical to another argument of the critics—India’s success in reducing the impact of Covid is not due to policies, but due to good luck. Not policy, not execution, but luck. Was it said, prior to September-October that India’s Covid cases were “high” because of bad luck? Of course not. But it proves my point that if the only criticism of the Budget is that of “execution/implementation” then there is universal agreement that Budget FY22 is historic.
I cannot remember the last time I was a witness to such a well-crafted budget—a Budget that lays the foundation for a sustainable recovery in GDP growth and welfare improvement. What is even more remarkable is that the good Budget came in the year of the farmers protests. The government stayed the course of reform, despite extreme provocation. History will record the boldness—and India will benefit from the vision.
Author: Surjit S Bhalla, Executive Director IMF representing India, Sri Lanka, Bangladesh and Bhutan. The views expressed are those of the author and do not necessarily represent the views of the IMF, its Executive Board, or IMF management
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